Addthis ch15

(1)

Stockholders’ Equity

Chapte

r

15

Intermediate Accounting

12th Edition

(2)

1.

Discuss the characteristics of the corporate form of

organization.

2.

Identify the key components of stockholders’ equity.

3.

Explain the accounting procedures for issuing shares of stock.

4.

Describe the accounting for treasury stock.

5.

Explain the accounting for and reporting of preferred stock.

6.

Describe the policies used in distributing dividends.

7.

Identify the various forms of dividend distributions.

8.

Explain the accounting for small and large stock dividends,

and for stock splits.

Learning Objectives

(3)

Issuance of

stock

The Corporate

Form

Capital stock

or share

system

Variety of

ownership

condition and

dividend

Disclosure of

(4)

Three primary forms of business

organization

The Corporate Form of Organization

Proprietorsh

ip

Partnership

Corporation

Special characteristics of the corporate form:

1. Influence of state corporate law.

2. Use of capital stock or share system.

3. Development of a variety of ownership

(5)

State Corporate Law

The Corporate Form of Organization

Corporation must submit

articles of

incorporation

to the state in which

incorporation is desired.

General Motors

- incorporated in Delaware.

(6)

Capital Stock or Share System

The Corporate Form of Organization

In the absence of restrictive provisions, each share

carries the following rights:

1. To share proportionately in profits and losses.

2. To share proportionately in management (the

right to vote for directors).

3. To share proportionately in assets upon

liquidation.

4. To share proportionately in any new issues of

(7)

Variety of Ownership Interests

The Corporate Form of Organization

Common stock represents basic ownership

interest.

Bears ultimate risks of loss.

Receives the benefits of success.

Not guaranteed dividends nor assets upon

dissolution.

Preferred stock

is created by contract, when

stockholders’ sacrifice certain rights in return for

other rights or privileges, usually dividend

(8)

Contributed

Two Primary

Sources of

Equity

(9)

Issuance of Stock

Accounting problems:

1. Par value stock.

2. No-par stock.

3. Stock issued with other securities.

4. Stock issued in noncash transactions.

5. Costs of issuing stock.

Corporate Capital

(10)

Par Value Stock

Low par values help companies avoid a

contingent liability.

Corporations maintain accounts for:

Preferred Stock or Common Stock.

Additional Paid-in Capital

Corporate Capital

(11)

BE15-1

: Lost Vikings Corporation issued 300

:

shares of $10 par value common stock for

$4,100. Prepare Lost Vikings’ journal entry.

Cash

4,100

Common stock

(300 x $10)

3,000

Journal entry:

Additional paid-in capital

1,100

Corporate Capital

(12)

No-Par Stock

Reasons for issuance:

Avoids contingent liability.

Avoids confusion over recording par

value versus fair market value.

Corporate Capital

Some states require that no-par stock have a

(13)

BE15-2

: Shinobi Corporation issued 600 shares of

:

no-par common stock for $10,200. Prepare Shinobi’s

journal entry if (a) the stock has no stated value,

and (b) the stock has a stated value of $2 per share.

Cash

10,200

Common stock

10,200

Journal entry:

Corporate Capital

Cash

10,200

Common stock

(600 x $2)

1,200

Additional paid-in capital

9,000

a.

(14)

Stock Issued with Other Securities

Two methods of allocating proceeds:

1. the

proportional

method and

2. the

incremental

method.

Corporate Capital

(15)

BE15-4

: Primal Rage Corporation issued 300 shares of

:

$10 par value common stock and 100 shares of $50 par

value preferred stock for a lump sum of $14,200. The

common stock has a market value of $20 per share, and

the preferred stock has a market value of $90 per share.

Corporate Capital

Number

Amount

Total

Percent

Common stock

300 x

$

20.00 =

$

6,000

40%

Preferred stock

100 x

90.00 9,000

60%

Fair Market Value

$

15,000

100%

Allocation:

Common

Preferred

Issue price

$

14,200

$

14,200

Allocation %

40%

60%

Total

$

5,680

$

8,520

(16)

BE15-4

: Primal Rage Corporation issued 300 shares of

:

$10 par value common stock and 100 shares of $50 par

value preferred stock for a lump sum of $14,200. The

common stock has a market value of $20 per share, and

the preferred stock has a market value of $90 per share.

Corporate Capital

Cash

14,200

Preferred stock

(100 x $50)

5,000

Journal entry (Proportional):

Additional paid-in capital-preferred

3,520

Common stock

(300 x $10)

3,000

(17)

BE15-4

: (Variation

: (

Variation

) Primal Rage Corporation issued 300

)

shares of $10 par value common stock and 100 shares of

$50 par value preferred stock for a lump sum of $14,200.

The common stock has a market value of $20 per share,

and the value of the preferred stock is

unknown

.

Corporate Capital

Number

Amount

Total

Common stock

300 x

$

20.00 =

$

6,000

Preferred stock

100 x

-Fair Market Value

$

6,000

Allocation:

Common

Preferred

Issue price

$

14,200

Common

(6,000)

Total

$

6,000

$

8,200

(18)

Corporate Capital

Cash

14,200

Preferred stock

(100 x $50)

5,000

Journal entry (Incremental):

Additional paid-in capital-preferred

3,200

Common stock

(300 x $10)

3,000

Additional paid-in capital-common

3,000

BE15-4

: (Variation

: (

Variation

) Primal Rage Corporation issued 300

)

shares of $10 par value common stock and 100 shares of

$50 par value preferred stock for a lump sum of $14,200.

The common stock has a market value of $20 per share,

(19)

Stock Issued in Noncash Transactions

The general rule:

Companies should

record stock issued for services or property

other than cash at either the:

fair value of the stock issued or

fair value of the noncash consideration

received,

whichever is more clearly determinable.

Corporate Capital

(20)

Corporate Capital

Land

80,000

Common stock

(24,000 x $1)

24,000

April 1

Issued 24,000 shares of common stock for

land. The asking price of the land was $90,000; the

fair market value of the land was $80,000.

Additional paid-in capital

56,000

E15-2

: Kathleen Battle Corporation was organized on

:

January 1, 2007. It is authorized to issue 500,000 shares

of no par common stock with a stated value of $1 per

(21)

Corporate Capital

Organization expense

50,000

Common stock

(10,000 x $1)

10,000

Aug. 1

Issued 10,000 shares of common stock to

attorneys in payment of their bill of $50,000 for

services rendered in helping the company organize.

Additional paid-in capital

40,000

E15-2

: Kathleen Battle Corporation was organized on

:

January 1, 2007. It is authorized to issue 500,000 shares

of no par common stock with a stated value of $1 per

(22)

Costs of Issuing Stock

Direct costs incurred to sell stock, such as

underwriting costs,

accounting and legal fees,

printing costs, and

taxes,

should be reported as a

reduction

of the

amounts paid in (additional paid-in capital).

Corporate Capital

(23)

Reacquisition of Shares

Corporations purchase their outstanding stock:

To provide tax-efficient distributions of excess

cash to shareholders.

To increase earnings per share and return on

equity.

To provide stock for employee stock

compensation contracts or to meet potential

merger needs.

To thwart takeover attempts or to reduce the

number of stockholders.

Corporate Capital

(24)

Purchase of Treasury Stock

Two acceptable methods:

Cost method

(more widely used).

Par or Stated value method.

Treasury stock, reduces stockholders’

equity.

Corporate Capital

(25)

Corporate Capital

Treasury stock

(1,000 x $28)

28,000

Cash

28,000

Illustration

: UC Company originally issued 15,000

shares of $1 par, common stock for $25 per share.

Record the journal entry for the following transaction:

April 1

st

the company re-acquired 1,000 shares for

(26)

Sale of Treasury Stock

Above Cost

Below Cost

Both increase total assets and stockholders’

equity.

Corporate Capital

(27)

Corporate Capital

Cash

(500 x $30)

15,000

Treasury stock

(500 x $28)

14,000

Illustration

: UC Company originally issued 15,000

shares of $1 par, common stock for $25 per share.

Record the journal entry for the following transaction:

June 1

st

Sold 500 shares of its Treasury Stock for $30

per share.

(28)

Corporate Capital

Cash

(300 x $9)

2,700

Treasury stock

(300 x $28)

8,400

Illustration

: UC Company originally issued 15,000

shares of $1 par, common stock for $25 per share.

Record the journal entry for the following transaction:

Oct. 15

th

Sold 300 shares of its Treasury Stock for $9

per share.

Paid-in capital treasury stock

1,000

Retained earnings

4,700

(29)

Corporate Capital

Cash

(100 x $11)

1,100

Treasury stock

(100 x $28)

2,800

Illustration

: UC Company originally issued 15,000

shares of $1 par, common stock for $25 per share.

Record the journal entry for the following transaction:

Oct. 30

th

Sold 100 shares of its Treasury Stock for

$11 per share.

(30)

Corporate Capital

Common stock

(100 x $1)

100 Paid-in capital common

(100 x $24)

2,400

Illustration

: UC Company originally issued 15,000

shares of $1 par, common stock for $25 per share.

Record the journal entry for the following transaction:

Nov. 10

th

Retired remaining 100 shares of its

Treasury Stock.

Treasury stock

(100 x $28)

2,800

(31)

Corporate Capital

Illustration 15-4

(32)

Corporate Capital

Illustration 15-5

(33)

Features often associated with preferred stock.

1. Preference as to dividends.

2. Preference as to assets in liquidation.

3. Convertible into common stock.

4. Callable at the option of the corporation.

5. Nonvoting.

Preferred Stock

(34)



_Cumulative



_{Participating}



_Convertible



Callable



_Redeemable

Preferred Stock

Specific Features of Preferred Stock

A corporation may

attach whatever

preferences or

restrictions, as long as

it does not violate its

state incorporation law.

(35)

Dividend Policy

Dividend distributions generally are based on

accumulated profits (retained earnings).

Few companies pay dividends in amounts

equal to their legally available retained

earnings.

Why?

Maintain agreements with creditors.

Meet state incorporation requirements.

To finance growth or expansion.

To smooth out dividend payments.

(36)

1. Cash dividends.

2. Property

dividends.

Types of Dividends

Dividends require information concerning

three dates:

a.

Date of declaration

b.

Date of record

c.

Date of payment

3. Liquidating

dividends.

(37)

Cash Dividends

Board of directors vote on the declaration

of cash dividends.

A declared cash dividend is a liability.

Companies do not declare or pay cash

dividends on treasury stock.

Types of Dividends

(38)

Illustration

What would be the journal entries

made by a corporation that declared a $50,000

cash dividend on March 10, payable on April 6

to shareholders of record on March 25?

March 10 (Declaration Date)

Retained earnings

50,00

0 Dividends payable

50,00

0 March 25 (Date of Record)

No entry

April 6 (Payment Date)

Dividends payable

50,00

Debit

Credit

Cash Dividend

(39)

Property Dividends

Dividends payable in assets other than

cash.

Restate at fair value the property it will

distribute, recognizing any gain or loss.

Types of Dividends

(40)

Illustration

A dividend is declared Jan. 5th and paid

Jan. 25th, in bonds held as an investment; the bonds

have a book value of $100,000 and a fair market

value of $135,000.

Date of Declaration

Investment in

bonds

35,00

0 Gain on investment

35,00

0 and

Date of Issuance

Property dividend

135,000

Debit

Credit

Retained earnings

135,000

Property dividend

(41)

Liquidating Dividends

Any dividend not based on earnings

reduces corporate paid-in capital.

Types of Dividends

(42)

June 1 (Payment Date)

April 20 (Declaration Date)

Retained earnings

575,000

Additional paid-in capital 125,000

Debit

Credit

Dividends payable

700,000

Dividends payable

700,000

BE15-12

Radical Rex Mining Company declared, on

April 20, a dividend of $700,000 payable on June 1. Of

this amount, $125,000 is a return of capital. Prepare

the April 20 and June 1 entries for Radical Rex.

Liquidating Dividend

(43)

Stock Dividends

Issuance of own stock to stockholders on a

pro rata basis, without receiving any

consideration.

When stock dividend is less than 20–25

percent of the common shares

outstanding, company transfers

fair

market value

from retained earnings

(

small stock dividend

).

Types of Dividends

(44)

10% stock dividend is

declared

_{Retained earnings}

_20,00

0 Common stock dividend

distributable

500 Debit

Credit

Additional paid-in capital

19,50

0 Stock issued

Common stock div.

distributable

500 Common stock

500 Illustration

HH Inc. has 5,000 shares issued and

outstanding. The per share par value is $1,

book value $32 and market value is $40.

Stock Dividend

(45)

Stock Split

To reduce the market value of shares.

No entry recorded for a stock split.

Decrease par value and increased

number of shares.

Types of Dividends

(46)

2 for 1 Stock Split

No Entry -- Disclosure that par is now $.50

and shares outstanding are 10,000.

Stock Dividend

(47)

Stock Split and Stock Dividend Differentiated

If the stock dividend is large, it has the same effect

on market price as a stock split.

A stock dividend of more than 20–25 percent of the

number of shares previously outstanding is called

a

large stock dividend

.

With a large stock dividend, transfer from retained

earnings to capital stock the

par value

of the

stock issued.

Types of Dividends

(48)

Illustration HH Inc. has 5,000 shares issued and

outstanding. The per share par value is $1,

book value $32 and market value is $40.

50% stock dividend is

declared

_{Retained earnings}

_2,500

Common stock dividend

distributable

2,500

Debit

Credit

Stock issued

Common stock dividend

distributable

2,500

Common stock

2,500

Stock Dividend

(49)

Presentation and Analysis of

Stockholders’ Equity

Presentation and Analysis of

Stockholders’ Equity

Presentati

on

Balance

Sheet

Illustration 15-13

(50)

Presentation and Analysis of

Stockholders’ Equity

Presentation and Analysis of

Stockholders’ Equity

Illustration 15-14

(51)

Ratio shows how many dollars of net income the

company earned for each dollar invested by the

owners.

Analysis

Net income – Preferred dividends

Average common stockholders’

equity

Rate of

Return on

Common

Stock Equity

=

Presentation and Analysis of

Stockholders’ Equity

Presentation and Analysis of

(52)

It is important to some investors that the

payout be sufficiently high to provide a good

yield on the stock.

Analysis

Cash dividends

Payout

Ratio

=

Presentation and Analysis of

Stockholders’ Equity

Presentation and Analysis of

Stockholders’ Equity

(53)

The amount each share would receive if the

company were liquidated on the basis of

amounts reported on the balance sheet.

Analysis

Common stockholders’ equity

Book Value

Per Share

₌

Presentation and Analysis of

Stockholders’ Equity

Presentation and Analysis of

Stockholders’ Equity

(54)

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